Fitch: SPE Structure Holds up in GGP Ch. 11 but Adds Costs to U.S. CMBS Trusts

NEW YORK--(BUSINESS WIRE)--The integrity of U.S. CMBS loan special purpose entities (SPE) has been upheld by the bankruptcy court rulings to date in the General Growth Properties, Inc., (GGP) bankruptcy case, though the costs of defending the bondholders' positions will ultimately create higher losses on the subordinate bonds, according to Fitch Ratings.

Recent rulings by the bankruptcy court regarding GGP's decision to include individual property SPEs in its April 16 Chapter 11 bankruptcy reinforce that SPEs are 'bankruptcy remote' rather than 'bankruptcy proof'. The court's rulings to date maintain the integrity of the SPE structure, but diminish the flexibility and control typically granted to the special servicer during traditional loan work-outs.

The most recent bankruptcy court ruling on May 13 maintained the separate legal structure of the SPEs, and provided bondholders assurances that GGP would continue to make payments on their loans. However, 'positions taken by GGP to date lead Fitch to believe that certain CMBS bondholder protections may be in jeopardy in the future,' said Group Managing Director and U.S. CMBS group head Huxley Somerville. The Debtor in Possession (DIP) financing approved by the court does not allow the DIP lender to prime the existing mortgages or place junior liens on the SPE properties, as initially proposed.

In addition, the trust servicers were given an administrative lien on the excess cash flow in the main collection account. Fitch considers this as favorable for the bondholders, although it recognizes that GGP'S bankruptcy reduces the servicers' control over loan workouts or modifications. In a workout, special servicers generally use their control over the cash accounts to elicit borrower concessions. Since GGP's SPEs are part of the bankruptcy filing, decisions that are usually the province of the special servicer are now within the jurisdiction of the bankruptcy court.

Also included in the ruling was the requirement that GGP continue to pay interest due on the existing mortgages of the SPEs at the contractual, non-default rate. While this implies a willingness on GGP's part to abide by the general terms of their loan documents, master servicers will now need to advance any portion of the contractual monthly debt service payments which are principal. Since Fitch's ratings address timely payment of interest and ultimate receipt of principal, 'CMBS ratings will not be immediately affected, though losses to the most junior bondholders in the respective securitizations could increase depending on the duration of advancing and the ultimate loan resolutions in the GGP bankruptcy.' said Somerville.

Fitch expects GGP's bankruptcy to be lengthy and complicated, with the near term impact to CMBS bonds stemming primarily from fees incurred by the trust, such as special servicing and modification fees and legal costs to defend the bondholders' position. While servicing and modification fees are clearly identified in the respective deal documents, estimating legal costs will likely prove much more difficult as they will depend on the length of the proceedings and the extent of the various rulings. These costs could be significant in a case of this size. According to historical data accumulated by Fitch's surveillance group, legal costs on resolved loans averaged approximately 1% in 2008.

Many servicers have indicated that costs associated with the loans will be divided across all of the affected GGP loans, which will mitigate the impact on any one trust. However, when presented for reimbursement, these fees will result in interest shortfalls to bondholders. Servicers are generally mindful of taking reimbursements over time in such a way that avoids causing shortfalls to senior rated bonds, but with some older vintage transactions, where monthly cash flow may be diminishing due to bond amortization, higher rated classes could be impacted. In the event of interest shortfalls to investment grade classes, Fitch places those classes on Rating Watch Negative until they are repaid in full. While it is still too early to determine what kind of resolution will be reached regarding the individual properties, since property performance is generally stable, it is likely that maturity extension will be negotiated

Following GGP's bankruptcy filing, all GGP loans included in the filing which are in securitizations rated by Fitch, were identified as Fitch Loans of Concern. Although many of the GGP loans have low leverage, Fitch no longer considers them to have investment grade characteristics, which increases credit risk to the junior bonds as well as the risk of future downgrades to those classes. To reflect the higher risk to the bonds and the increased likelihood of interest shortfalls to the trusts, Fitch placed Negative Outlooks on 99 classes across 21 transactions. The 56 GGP loans included in Fitch rated transactions are generally considered to have stable performance with debt service coverage ratios (DSCR)ranging from 1.12 times (x) to 2.97x resulting in a weighted average DSCR of 1.81x based upon the most recent financials provided. Deal concentrations to GGP exposures for Fitch rated transactions range from less than 1% to 12.6%. Even with an assumed loss of 5% on each GGP loan within a Fitch rated transaction, the impact on investment grade bonds would be minimal assuming no other credit issues materialize in the pool.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.